Riyadh is starting to feel a little too crowded for some locals these day, with complaints about traffic jams now a regular feature in the newspapers. Unfortunately for the city’s commuters, the problem is going to get worse before it gets better as work ramps up on a six-line metro network this year. Despite promises from the consortia building the network to keep disruption to a minimum it is inevitable that there will be road closures and diversions across the city between now and 2019 when it is due to be completed.

Such are the growing pains of a rapidly expanding city. The Saudi capital’s population currently stands at 5.7 million and the number is growing by about 4% a year. That is causing more problems than just traffic jams, however. One of the most pressing issues is the shortage of housing: all those people need somewhere to live.

As a result of high prices only around 30% of Saudis own their own homes and expensive housing is not restricted to the capital. Across the country there is a desperate need for more affordable housing and that is only going to become more apparent in the years ahead as the country’s predominantly young population grows up. The IMF estimates that the population is growing by around 600,000 a year.

As it currently stands many people are likely to find that they are unable to afford to buy their own property or even land to build on. The biggest problem is in the lower end of the market, where there is little profit margin for developers and consequently not enough properties are being built. But the issue of affordability is now spreading to other, more affluent parts of the Saudi market too.

“The price of land and the price of housing in the major cities is very high and almost out of reach of the middle class,” warns one local economist. “Real estate is overpriced in the kingdom.”

The government has at least recognised the problem. In 2011, King Abdullah announced a SR250bn ($67bn) house-building programme which will add 500,000 new homes. Like the metro project it is being funded from money held at the central bank, SAMA, rather than through the regular government budget, so there are no financial impediments to it moving ahead and it is not dependent on oil prices staying high. “These two projects are so important for the Saudi economy that the government wants to protect them from any fluctuations in the budget,” adds the economist. Yet despite the ring-fencing of the money, actual progress on the ground has been slow. Some schemes have been built but nowhere near enough to close the gap between demand and supply. Local bank Samba pointed out in a recent report on the Saudi economy that the housing sector is likely to continue to be held back by structural constraints and that in turn is dampening down other areas of economic activity.

“The outlook for [real estate] would be significantly more robust were the housing market able to attain “escape velocity”. However there have been a number of false starts since the launch of the house building initiative in 2011,” the bank said in its report released in mid-January.

“Were the real estate market to gain traction, then increasing household creation and market penetration would provide further long-term support for the retail sector.”

One of the fundamental underlying problems is a lack of affordable land to build on. Too much of it is held by investors who seem content to treat it as a long-term store of value rather than an asset that can be exploited through development.

“Families are buying land but they are not developing it while expecting the land to increase in value,” says one real estate agent. “That’s very much the Saudi mentality. They’re traders in land and that often has the negative impact of pushing prices up.”

Partly as a result of this the government has been building on land further out from city centres. A large new housing scheme in Riyadh to the northwest of King Khalid International Airport was announced by the Ministry of Housing in April last year. The project covers 7,000 housing units on a five square kilometre site. It is being implemented by Rashed Contracting Company and is due to take around 20 months to build at a total cost of more than SR1bn ($270m).

A second phase of another affordable housing scheme, known as Shams al Ghourob by Affordable House, is being built to the southwest of the city according to property consultants Land Sterling. Yet such projects only provide a fraction of what is needed in the city. Land Sterling estimates that 50,000 new units are needed in Riyadh alone every year for the next ten years.

If the housing gap is to be closed in Riyadh or else- where it will need the government to take a more proactive position and to work more closely with the private sector.

“The biggest housing shortages are in the affordable end of the market. That’s kingdom wide and it’s been the case for a while,” says Craig Plumb, head of research for the Middle East region at Jones Lang LaSalle, a real estate agency. “There are projects in Riyadh that the Ministry of Housing is doing and I think that’s going to have to be the way forward. The private sector isn’t going to do these projects by themselves. They’re going to need to work with the Ministry of Housing to develop them.

They’re addressing that problem but it’s going to take a number of years.” Another measure that may help in time is the mortgage law, which has been gradually brought in over recent years. The latest stage of the long process has seen the central bank issuing licenses for real estate finance and financial leasing to a number of institutions over the past few months.

The first to benefit was Riyad Bank which was granted licenses for both activities on 15 December 2013. Since then SAMA has approved licenses for five others, including Arab National Bank and SABB. The non-bank groups that have been awarded licenses include Dar Al Tamleek Company, Nayifat Company and Amlak International.

The last of these is a subsidiary of Saudi Investment Bank. The expansion of the real estate finance market should prove important in the long term but few banks are expected to lend heavily in the near term. Bankers in the country say they will take a cautious approach at first while they wait to see how the laws work out in practice. Of particular interest will be the attitude that courts take in the event of any default. It may be some years before a case goes through the justice system but until it does, and until banks know whether they will be able to seize a property when a customer falls behind with their mort- gage payments, they will remain cautious about lending.

The unmet demand for housing finance is clear when you look at the government’s Real Estate Development Fund, which already provides loans to locals but which is badly stretched. National Commercial Bank says there are 537,000 applications on the fund’s waiting list and a further 1.7 million applications have yet to be reviewed for eligibility. At the current rate of progress, with 40,000 loans approved a year, it will take more than a decade just to clear the waiting list.

In the meantime, some other government initiatives are making the situation worse, at least in the short-term. Jones Lang LaSalle says that the Ministry of Housing has signed contracts worth SR4bn ($1.07bn) to develop around 40,000 residential units in eight developments around the country, yet it also points out that the crack- down on illegal foreign workers over the past year – many of who worked in the construction sector – is leading to labour shortages that will cause delays to projects and lead to a rise in construction costs.

As a result of the continuing mismatch between supply and demand, along with this rise in costs for developers, the price of real estate is likely to keep on growing.

Villa prices rose by around 4% a year in Riyadh last year, while the cost of an apartment increased by 3 to 6%. And the IMF says that housing costs, along with rising food prices, are one of the key elements in the country’s rising inflation rate.

In the year to May 2013 inflation was 3.8%, according to the IMF, but if you exclude food and housing it would have been just 2.6%. Such increases may not look all that significant, but when house prices are already out of reach of so many people it simply adds to the problem.